Fitch: Turkey Tightening Shows Monetary, Fiscal Policy Contrast

Reuters Staff

6 Min Read

(The following statement was released by the rating agency) LONDON, December 15 (Fitch) Thursday's interest rate increase shows that Turkey's central bank will act when facing tougher external conditions, but not necessarily in the most effective fashion, Fitch Ratings says. More positively, recent fiscal tightening illustrates a commitment to fiscal discipline following a period of counter-cyclical stimulus. The Central Bank of the Republic of Turkey (CBRT) raised its late liquidity window lending rate to 12.75%, from 12.25% on Thursday, citing "elevated levels of inflation and recent developments in cost factors." The CBRT left its overnight rates and one-week repo rate unchanged, but said it would "continue to use all available instruments in pursuit of the price stability objective." Headline inflation hit a multi-year high of 13% in November and two-year inflation expectations have continued to edge up. Rising inflation, market concerns about the CBRT's limited response, and developments in key international relations had sent the lira to all-time lows against the dollar and euro in late November. The currency fell on Thursday, as a larger rate increase had been widely expected. In Fitch's view, the complex monetary policy framework undermines monetary policy transmission mechanisms. Thursday's rate rise followed several administrative measures that could have a long-term impact on FX demand or slow credit growth, but give the impression the CBRT prefers to avoid rate rises. The CBRT dropped references to simplification of the policy framework from its recent Monetary and Exchange Rate Policy for 2018 statement. Turkey is one of only two sovereigns rated above the 'B' category that we expect to have double-digit inflation in 2017. High inflation inhibits the development of domestic savings markets, which underpins a high reliance on external borrowing and means Turkey may face pressure when global financial conditions tighten, particularly as the current account deficit is widening. Data on Monday showed that in October the current account deficit had more than doubled from a year earlier. We lowered our exchange rate and raised our inflation projections in our latest "Global Economic Outlook". Growth in 2017 looks set to outpace our projection following a very strong 3Q outturn published on Monday, driven by large base effects. However, we expect growth to slow in 2018, as fiscal stimulus is rolled back, and we lowered our 2018 forecast to 3.9% in the GEO. Planned fiscal tightening in 2018, ahead of elections in 2019, suggests the authorities are keen to maintain fiscal discipline after this year's fiscal loosening caused the central government's 9M17 primary deficit rise to an eight-year high. Turkey's public debt metrics are superior to both 'BB' and 'BBB' category medians. Fiscal measures approved in late November include a temporary 2pp rise in corporation tax, increases in sales tax on vehicles, tobacco and soft drinks and the removal of some tax rebates. This tightening is projected to narrow the budget deficit in 2018. Off-budget spending and contingent liabilities, such as those arising from the enlargement of the sovereign guarantee for the Credit Guarantee Fund in 2017, and potentially from the operation of the Turkey Wealth Fund, are rising from a low level and also inform our fiscal assessment. We view recent policy actions as broadly consistent with our assumptions on economic policy management. These underscore our long-held view that external finances are the key weakness for Turkey's sovereign credit profile and fiscals the key strength. This is reflected in Turkey's 'BB+'/Stable rating, which we affirmed in July. <a href="https://www.fitchratings.com/site/re/10013692">Turkey - December 2017 Global Economic Outlook Forecast Contact: Paul Gamble Senior Director Sovereigns +44 20 3530 1623 Fitch Ratings Limited 30 North Colonnade London E14 5GN Ed Parker Managing Director Sovereigns +44 20 3530 1176 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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